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Watch: Will Chinese steel end 2018 with a bang or a whimper?

China's two-track steel market is showing signs of slowing, with weak consumer data and the US-China trade conflict dampening sentiment, but Beijing will do its best to support the economy for the remainder of 2018.

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Welcome to The Snapshot, a series examining the forces shaping and driving global commodities markets today.

Last week, the Shanghai composite saw its biggest day-on-day increase since March 2016. Investors were responding to the government saying it would help out smaller, privately-owned listed companies. Policy announcements aimed at supporting the economy tend to have a positive impact on physical and futures steel prices in China. Yes, there was a modest rise seen for Shanghai rebar futures – but overall there was little reaction.

In the case of long steel products such as rebar, the feeling in the market is that domestic prices are already high, and the opportunity to rise further is likely to be limited. For flat steel products, such as hot rolled coil, the outlook is less rosy, and the market is in the doldrums at the moment.

It has become something of a two-paced market. Rebar has been outperforming HRC – inverting the traditional relationship between the two products once again – since early August. At the moment, the gap between rebar and HRC in eastern China is the equivalent of about $55-58/mt.

From a macro-economic perspective, the subdued performance of flat steel products is slightly concerning. This is the material used in manufacturing, cars, fridges and other white goods.

Indeed, China's GDP growth in the previous quarter hit a 10-year low of 6.5%.

The real estate and construction sectors have been robust but there was even some weakness in these markets in September.

That said, the latest S&P Global Platts China Steel Sentiment Index recorded a headline reading of 46.03 out of a possible 100 points in October. The headline number, which looks at new order expectations in the month ahead, was the third-consecutive monthly increase and the strongest reading since last April.

There is plenty of residual uncertainty in China's the market due to the ongoing trade conflict with the US, but the latest index shows that sentiment regarding the domestic market remains generally positive. A knock-on effect of the US steel import tariffs is that material is being redirected into the Asian region from countries such as Turkey and Qatar, providing more competition for Chinese exporters. But with margins far higher for domestic sales, Chinese mills and traders are fairly sanguine about export opportunities in any case.

As the announcement on small business last week indicates, Beijing is likely to pull out all the stops over the rest of this year to ensure the tariff situation does not erode economic confidence. This will help support domestic steel prices.

And even though the long and flat steel markets have diverged, it is worth remembering that China's steel mill margins are well above the average seen last year and in 2016.

Until next time on Snapshot, we'll be keeping an eye on the markets.